Supply Chain Bottleneck Data
2021 ended with CPI inflation at 7% in the US and 5% in the Euro Area. These historically high inflation readings are the result of excess demand created during COVID-19 and supply chain bottlenecks which are impeding the normal flow of physical goods from manufacturers to consumers. The difference between supply and demand for goods and services influences the inflation rate. This will impact forward expectations for interest rates. This has implications for banks and other firms in the financial services sector.
This piece focusses on only one aspect of how we think about inflationary expectations and rates. It looks at some key supply chain bottleneck data and how they should be interpreted.
The Overall Picture
The New York Fed has developed an index which paints an overall picture of supply chain bottleneck data. This is a combination of several measures of transport costs and PMI subcomponents. Readings in Q4 2021 were the highest on record at over 4 standard deviations away from historical average.
Supply chain bottlenecks are arising even although the units of world trade are below pre-pandemic levels. The volume of trade is only higher today because of inflated prices. This data is provided by the Netherlands Bureau for Economic Policy Analysis. We have taken their World Trade Monitor data and estimated the units of trade. This indicates that costs may remain elevated as units of world trade rise.
Transport Costs
The high costs of transport can be seen in individual series such as the Drewry air freight price. This measures the cost of shipping one kilogram of goods across 28 major east-west air routes (including from China to the US). Before the pandemic, it cost just $3 to ship a kilogram of goods. There was then an acceleration to $6 in 2020, before a decline to near $4 in early 2021. It has since accelerated again to over $7 today.
This can also be seen in the Baltic Dry Index, one of the most widely referenced supply chain bottleneck data series. This measures average prices paid for the transport of dry bulk materials across more than 20 shipping routes. Pre-pandemic, the index was mostly in the 1,000 to 2,000 range. It surged in 2021 to reach a peak of over 5,600 in October. It has since fallen to around 1,300. This is perhaps a signal that shipping pressures may be easing.
Where the above two metrics measure the cost of international transport, this measures the demand for land transport within the US. Truckstop.com is a platform where truck drivers can accept shipments offered by companies. Their demand index allows us to see the rising pressures which are pushing up transport costs. Demand peaked in 2021 and declined before end-year. It has since reaccelerated in 2022.
China’s Zero COVID Policy
China has operated a zero COVID policy since the start of the pandemic. This means that any new outbreaks of the virus are met with deep lockdowns and widespread testing across major cities. The policy has successfully stopped the virus spreading across the country. However, it also means that strict lockdowns are still taking place while most western countries have re-opened.
This has meant disruption to shipping ports, where large volumes of goods are exported to the west. We are tracking this by looking at the rise in COVID cases in coastal provinces. This is an often overlooked supply chain bottleneck data series. New cases in January 2022 were at their highest point since the original Wuhan outbreak in February 2020.
It will be increasingly difficult for China to maintain a zero COVID policy in the face of the more transmissible Omicron variant. If China abandons the policy, we expect some further disruption as China manages the spread of the virus. Thereafter, there should be a decline in disruption to factories and ports. This will ultimately help resolve the supply chain bottlenecks. Eurasia Group has listed this as its top risk for 2022.
Inventories
Inventory data from the US allows us to see the supply chain bottlenecks between manufacturers and wholesalers/ retailers. In pre-pandemic years, there were similar levels of inventory in all 3 parts of the domestic supply chain. This was a sign that goods were flowing easily from manufacturers to wholesalers and on to retailers. Before the 2008 crash, retailers held the highest levels of inventory.
The pandemic has flipped these trends, with retailers now having historically low levels of inventory. Wholesalers have also seen a decline. Manufacturers have elevated levels of inventory. Lack of inputs due to supply chain bottlenecks abroad is the explanation for this. For example, car manufacturers are facing a shortage of silicone chips from Asia. This means that an inventory of unfinished cars is building. When these shortages ease, we should begin to see inventory levels in wholesalers and retailers rise. We may also see inventory levels fall in manufacturers.
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